What is capital reduction and how to proceed

Qu’what is the reduction of the share capital and how to proceed ?

A company has the possibility to increase or decrease its capital stock depending on the situation. These operations can be carried out to meet the needs of the company or the partners. That said, the reduction of capital is usually done in case of financial difficulties.

It must be approached taking into account the impact of the procedure on the image and professional relations of the company.

The reduction of the share capital: what does it consist of? ?

The reduction of the share capital is often considered to regularize the financial situation of a company. By definition, it consists of decreasing the amount of the company’s share capital. This operation becomes particularly necessary when the total equity is less than half the value of the share capital.

In this case, the latter must be reduced to rebalance the company’s capital level.

In order to adjust its share capital, the company must follow certain legal procedures at the level of the partners and the administration. The administrative steps can nevertheless be entrusted to a third party specialized in the field. It is enough to see the site of the provider in legal formalities to know the proposed offers and the included services.

For its part, the internal part is relatively simple.

The manager must first of all convene an extraordinary general meeting to decide and act on the reduction of the share capital. Indeed, this decision can only be made in the presence of all stakeholders. The participants can then support or oppose the project. This initiative is generally motivated by :

  • Financial losses creating an imbalance between share capital and equity;
  • Too little activity in relation to the share capital;
  • A voluntary exit of one of the partners;
  • A strategic reduction in the value of the shares..

Apart from the partners, the creditors can oppose the reduction of capital, if the reasons are not financial.

How to reduce its capital well ?

The reduction of the share capital is a simple but delicate operation. Beyond the questions of image, it requires a rather important amount to be effective in case of financial difficulties. The idea is indeed to free up liquidity in order to purge losses.

However, this can only be done if the company has the necessary means.

On the other hand, it is necessary to respect the legal minimum threshold for the SA (joint stock companies) and SCA (limited partnership with shares). This type of structure must have a share capital greater than 37,000 euros, in the absence of a public offering of securities. In any case, a company has the choice between three solutions to reduce its share capital. Among other things, it can :

  • Decrease the value of the securities (shares or units);
  • Reduce the number of shares;
  • To buy back and then cancel securities (in case of reduction not motivated by losses).

When taking over a company, it is also possible to reduce and then increase the share capital. This process allows, at first, to make up for losses and to clean up the equity capital. Then, the company will bring in new partners in order to restart its activity. This technique is commonly referred to as the “accordion fold”.

How to properly reduce your share capital?

What are the steps to achieve this ?

The extraordinary general meeting is essential to decide on the reduction of the share capital of a company. However, it is important to consult the articles of association beforehand to find out the terms and conditions for such a decision. Once the transaction is completed, the minutes must be filed with the court clerk or the CFE within 30 days.

Other formalities may vary depending on the legal form, structure and reason for the operation. In general, the manager must ask the auditor to draw up a report indicating the causes of the capital reduction. It is also assumed :

  • To update the articles of association of the company by modifying the amount and the distribution of the share capital;
  • Publish a notice of reduction of the share capital in the JAL (Journal d’annonces l├ęgales) specifying the old and new value of the share capital;
  • Draft a request for a change in capital to be filed with the clerk of the commercial court or with the business formality center.

The modification will be confirmed by the reception of a K-bis extract including the amount of the new share capital. Most often, this letter is received a few days after the filing of the application. However, the delay of reception depends on the interlocutor and the domiciliation of the company.

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